Offsetting Rental Losses: What Happens to the Deficit

Andriy Bezborodko · 2026-10-13

In your Annex V, there is a number with a minus in front of it at the bottom. Interest, depreciation and costs were higher than the rent. For many buyers of a financed apartment, this is the norm in the first few years, especially for new builds with degressive depreciation.

What happens to this minus? Usually, it simply reduces the tax on your salary. However, there are years when this does not work, for example when income drops due to parental leave or a job change. And there are circumstances under which the tax office does not recognise the losses at all.

We explain the rules and calculate an example for a normal year and a year with low income.

01How the loss is offset against salary

Income tax distinguishes between seven types of income. Wages are one, letting is another. The tax office calculates the result for each type and then adds everything together. A minus from letting thus automatically reduces the amount on which tax is due. Experts call this loss compensation.

You do not need to apply for this. It is sufficient to submit Annex V in full. In the case of married couples with joint assessment, offsetting also takes place across persons. The loss from the apartment belonging to one partner thus reduces the tax on the salary of the other.

Mira, 36, is a project manager and single. She bought a new-build apartment for €300,000 and financed it in full. In the first year, with degressive depreciation, a loss from letting of €14,068 results. Her taxable income without the apartment is €72,000. The name is fictitious, the figures are a calculation example and not a forecast.

The loss here has an almost full effect at the marginal tax rate. From €14,068, €5,662 is returned as tax savings, around 40%. Mira paid interest and costs for this, whereas the depreciation does not flow out.

02If the loss is greater than the income

Now the other year. Mira takes ten months of parental leave. Her income from work in this year is only €9,000; the parental allowance is tax-free. The loss from the apartment remains at €14,068.

First, what is there is offset. The €9,000 wages are fully balanced with the loss. This is bitter, because Mira would not have paid any tax on €9,000 anyway due to the basic allowance of €12,348. This part of the loss brings her nothing. Remaining are €5,068 that the year can no longer absorb.

For this remainder, there is Section 10d EStG.

The tax office determines the remaining loss in a separate notice. You should keep and check this notice, as it is the basis for subsequent years.

The same loss thus brings Mira around €3,550 less in the parental leave year than in a normal year. Whether carry-back or carry-forward is more favourable depends on in which year her tax rate is higher. In the example, both are close to each other.

03Does the tax office recognise losses over years?

Basically, yes. Tax-wise, an activity only counts if you intend to achieve a surplus in the long term. Lawyers call this the intention to generate income. In the case of long-term letting of an apartment, the tax administration assumes this without further audit (BMF letter dated 08.10.2004, margin no. 1). Even high depreciation does not change this. The use of special depreciation alone is not sufficient to refute the intention, according to the letter.

It is different if circumstances speak against it. Then the tax office checks whether an overall surplus is to be expected over a period of usually 30 years. Only linear depreciation is included in this forecast, not degressive or special depreciation.

The burden of proof lies with you. If you do sell earlier, for example due to divorce, job loss or illness, you should be able to prove that the decision was made later. According to the BMF letter, the tax office can even change final notices if the lack of intention only becomes apparent later.

04How long a loss typically lasts

The loss from a financed apartment is not a permanent state. With every instalment, the interest portion falls, and the degressive depreciation becomes smaller each year because it is calculated from the residual value. For Mira's apartment, with constant rent, it looks like this.

We consciously calculate without rent increases and without switching to linear depreciation in order not to predict any development. If the rent rises, the result becomes positive earlier. From this point on, you pay taxes on the surplus. The losses of the first few years are then an advantage in terms of timing, not a permanent gift.

A sale within ten years is taxable, and the depreciation claimed increases the profit. More on this in the guide Speculation period for real estate.

05For whom losses from letting have a good tax effect

06Risks and Limits

A tax loss is not a saving in itself. It only reduces tax by your tax rate, and you have paid for most of what is behind it. The only exception is depreciation, which does not flow out.

The effect depends on your income. If it falls, the savings also fall, as Mira's parental leave year shows. And the rules can change, for example with depreciation rates, the tariff or the limits of loss carry-forward. Added to this are the risks of any letting: loss of rent, vacancy, repairs, higher interest rates for follow-up financing. The values in this guide apply as of October 2026.

07Read more

• Taxing rental income
• Tax advantages of real estate as an investment
• Saving tax as an employee
• Tax return after real estate purchase
• Special and degressive depreciation
• Speculation period for real estate
• Calculator: Taxing rental income

08Sources

All sources retrieved on 13.10.2026.

• Section 2 EStG (para. 3), Section 10d EStG (Loss carry-back and carry-forward), Section 15b EStG, Section 21 EStG (para. 2), Section 32a EStG
• BMF letter dated 08.10.2004, IV C 3 - S 2253 - 91/04, Generating income from letting and leasing
• BMF letter dated 17.07.2007, IV B 2 - S 2241 b/07/0001, Application letter for Section 15b EStG, margin no. 9
• Sections 3, 4 Solidarity Surcharge Act 1995
• Example calculations: own calculation according to 2025 and 2026 tariffs, as of 13.10.2026

Note: This guide is general information and does not replace individual tax advice. All figures are example calculations with disclosed assumptions, as of 13.10.2026.